Christian Dior: Capital Appreciation Unlikely For Now (CHDRF)

winhorse Luxury fashion stock Christian Dior (OTCPK:CHDRF) (OTCPK:CHDRY) has been a good long-term buy for investors going for capital appreciation. At 293%, its price returns have far outstripped the returns on the S&P 500 (SP500) (see chart below) over the past decade. Notably, it has performed even better than the S&P Global Luxury Index, which is up by 75% over this time. Price Returns, 10Y (Seeking Alpha) But 2024 isn’t proving to be Dior’s year. Its price is down 5% year-to-date (YTD), slightly more than the luxury index, which is down by 4%. On the other hand, the SP500 has scaled new highs this year, with a 15% return. The question now is, are investors better off focusing on other stocks or the index itself than concerning themselves with Dior and the luxury sector as such? Softening demand There are certainly arguments that support this idea. For one, luxury sector demand has fizzled out. This was evident in the company’s first quarter (Q1 2024) figures, which saw a 2% contraction in reported revenues and just 3% organic growth. This, of course, was mirrored in the performance of its parent company LVMH (OTCPK:LVMHF) as well. Along with its still elevated trailing twelve months (TTM) GAAP price-to-earnings (P/E) ratio, the underwhelming demand resulted in a sell rating on it. In the two months since, its price has dropped by 11% and Dior has fallen in tow as well (see chart below). This is a warning sign enough. Price Returns, YTD (Seeking Alpha) Earnings contract in H2 2023 Consider the profits, too. Since the Q1 2024 figures were a trading update, the latest profits figure available is for the full year 2023. And that’s disappointing enough. The net income margin dropped to 6.3% in the second half of the year (H2 2023), while my estimates assumed that it would remain at the H1 2023 level of 8.3%. As a result, the full-year margin came off to 7.3%, compared to my assumption of it staying static at 8.3%. There were two reasons for a slower-than-expected net profit margin. The first was better-than-expected revenue growth. While I had assumed a 7.2% increase in the figure for the full year 2023, the actual figure came in at a stronger 9%, in reported terms. This is actually a positive reason for a lower margin, to be sure. But the second reason, not as much. As it happens, net profit attributable to Dior’s shareholders grew by just 8.8% in 2023, which was far lower than my estimate of a 21% increase. Zoning in on the breakup of 2023 earnings indicates that the difference between H1 and H2 is dramatic. From a 31.1% year-on-year (YoY) increase in H1 2023, the earnings contracted by 10.5% in H2 2023 as revenue growth slowed down, operating income growth slowed down to a crawl, and interest expenses increased. Unattractive market multiples The worse-than-expected net income, of course, impacted the market multiples too. Robust net income estimates had indicated a forward P/E of 17x for 2023, which wasn’t bad compared to the then TTM levels of 18.2x. However, with the actual earnings coming in much lower, the now TTM P/E is even higher at 18.7x. And this is despite the recent correction in Dior’s price. Going forward, I believe there’s little scope for improvement, either. To estimate the forward P/E, the revenue growth is assumed to be 3% in 2024, which is obtained from the average of analysts’ estimates on Seeking Alpha for LVMH. Next, the net margin is assumed to be the same as that in 2023, at 7.3%. This brings the forward P/E to 18.9x, which is a shade higher than even the current levels. Dividends are still worth noting Even though both the latest financials and market multiples indicate that there’s likely to be more weakness ahead for Dior, income investors might still want to consider the dividends. The company increased its dividends for 2023 by 8.3%, with the second tranche paid out in April 2024. This is far lower than the compounded annual growth rate (CAGR) of 16.7% over the past five years. Still, on its own, the increase looks good. With a dividend payout ratio of 35.8%, the company continues to have ample scope to increase dividends going forward as well. However, going by the ongoing slowdown in the luxury demand cycle, it’s fair to assume that dividend growth will continue to decline. To estimate the forward dividend yield, I’ve assumed that the dividend growth slows down to 2.4%, which is the same as the estimated increase for net earnings. The forward yield comes in at 1.9%. This isn’t the best yield out there, for sure. But as observed the last time, there’s something to be said for the company’s consistent dividend payouts over time. In fact, the long-term yield on cost, which is over the past 10 years, has also risen from 7.04%, when I last checked, to 8.54% now. What next? Unlike the last time, however, when I made a long-term case for Dior as an income investment, this time the intent was to assess how it fares from the perspective of capital appreciation. The verdict, of course, is that investors are better off staying away from Dior right now. Not only are its price returns negative YTD, so are the total returns. In other words, even its dependable dividends weren’t high enough to make up for the price weakness. Additionally, there’s little scope for any improvement in price going forward. The numbers up to Q1 2024 indicate a sharp weakening in demand. Additionally, the contraction in net profits in H2 2023 is discouraging too. Further, the TTM P/E is actually higher than it was the last I checked. All in all, there’s likely to be more downside to Christian Dior for now. I’d let it bottom out before considering buying again. However, with the stock already having dropped this year, and by an even bigger 15% over the past year, much of the decline is likely already done. This is especially as its TTM P/E isn’t very far from that of the consumer discretionary sector at 17.9x. And this is when luxury stocks typically trade at some premium. For this reason, it’s not one to sell, but I am reducing the rating to Hold. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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